Sajida Book Shop vs Kaumudi Exporters (P) Ltd. Company

Facts Of the Case

1. The applicant[1] in 1989 filed a company petition alleging that “the respondent-company, Kaumudi Exporters (Private) Limited failed and neglected to pay Rs. 5,54,910 debt to him with 12% interest from 09.07.1986”.
2. The applicant alleged in the company petition that the company was “unable to pay its debts and is also insolvent”.
3. Accordingly, the Applicant sought an order to wind up the respondent-company.
4. By order dated November 7, 1990, the company was ordered to be wound up.
5. after a year the applicant again approached via a miscellaneous company application under Sections 542 and 543(1) of the Companies Act,1956 seeking an order that respondents, the ex-administrators and officials of the corporation, Kaumudi Exporters (Private) Limited had misapplied, retained and turned out to be responsible or answerable for any cash or belongings of the corporation or had been responsible of misfeasance or breach of trust with regards to the corporation.
6. Further applicant submits that the deposit of Rs. 5,54,910 made by him with the company in liquidation is a security of trade deposit and that amount is not a debt or credit but a trust. So the respondents are liable to refund a quantity of Rs. 5,54,910/- to the corporation because of misfeasance or breach of trust with regards to the corporation.
7. To support this contention, the applicant relies on the following judgements

• Travancore National and Quilon Bank[2]
• Karnataka Films Ltd. v. Official Liquidator, Chitrakala Movietone Ltd.[3]
• re Indo-Burma Industries Ltd.[4]
• Ganesh Export and Import Co. v. Mahadeolal Nathmal[5]
• re, F & C Osier (India) Ltd. [6] and 
• Official Liquidator, Modern Transporters Pvt. Ltd v. Mulkh Rai Mehta[7]

8. Learned Company Judge discovered no purpose to provide the reliefs prayed for and brushed off the application maintaining that the applicant has now no longer succeeded in displaying that the administrators had been responsible of misapplication or misappropriation of quantities amounting to misfeasance or breach of trust with regards to the corporation

Issues

1. Does the matter of retention or misapplication amount to misfeasance or breach of trust as contented by the applicant?
2. Was the rejection of such an allegation by the company judge justifiable?

Held

1. Mere fact that the applicant had advanced security deposit does not mean that the amount has been retained or misapplied by any of the Directors personally.
2. Burden of proof, according to Kerala HC, is on the person who alleges that any of the directors has misapplied or retained the amount which is legitimately due to him from the company in liquidation.
3. Person who is seeking relief under Section 542 and 543 has to plead and prove the delinquency of the Director. Mere vague and general allegation would not be sufficient.
4. Court observed “A reading of the miscellaneous company application shows that there is no specific allegation against any of the former managing director or directors as to the role they have played in the alleged misapplication or misappropriation and consequent misfeasance. No details have been supplied in the application so that, the respondents can answer to such allegation. Even in evidence, the applicant has no definite case about the role of any, or each of the respondents. A bald allegation regarding purchase of land by another company of which respondents Nos. 2 to 8 are stated to be directors alone, is made.”
5. Section 543 deals with acts of commission and not of omission and the allegations in support of an application under section 543 shall always be specific.
6. Court cited excerpts of a Supreme Court judgement:

“It may be mentioned that misfeasance action against the directors is a serious charge. It is a charge of misconduct or misappropriation or breach of trust. For this reason the application should contain a detailed narration of the specific acts of commission and omission on the part of each director quantifying the loss to the company arising out of such acts or omissions”[8]

7. With regards to the second issue Court observed that under Section 543 of the Act in the absence of any specific allegation or positive evidence it is not possible or proper to indulge in an enquiry so as to compel an individual director to compensate the company.
8. Therefore, the learned company judge is justified in rejecting the application as no evidence has been adduced to establish the diversion of trust money.

References: 

[1] Sajida Book Shop vs Kaumudi Exporters (P) Ltd., 2007 135 CompCas 273 Ker.

[2] (1939) 9 Comp Cas 14.

[3] (1951)  21 Comp Cas 138; AIR 1952 Mad 481.

[4] 1957 (27) Comp. Cases 390.

[5] 1955 (25) Comp.Cases 357.

[6] 1976 Tax Law Reports 1442.

[7] 1971 (41) Comp. Cases 573.

[8] Official Liquidator v. Raghava Desikachar, (1974) 2 SCC 741 : AIR 1974 SC 2069; [1975] 45 Comp Cas 136, 142.